Unit 3 Topic 7 Flashcards
Since when have there been many changes in the financial services industry?
Since 1997, there have been many changes in the financial services industry that have impacted on the financial sustainability of individual consumers.
What is sustainable personal finance?
Achieving and maintaining a balance between personal income and expenditure - for the short, medium and long terms - so that individuals can satisfy their needs and achieve as many of their wants and aspirations as they can afford within their budget.
Give ways to manage personal finances to achieve sustainability over the long term.
- using budgets
- using cash-flow forecasts to plan income, spending, savings, investments and borrowing to pay for current needs and future life events
- using insurance to protect against risks
Give examples of events and issues that have driven change in the financial services sector over recent years.
- providers mis-selling products
- causes and consequences of the 2007-08 financial crisis
- the resulting recession
- investigations into fairness and consumer complaints
How has the changes that have occurred over the recent years taken form?
The changes that have occurred have taken various forms:
- new organisations have been established
- new institutional roles and responsibilities have been outlined
- legislation and regulation has been introduced in the European Union and the UK
- increased consumer protection measures have been put in place
- industry guidelines have changed
What is the impact caused by changes to the financial services industry in the recent years?
Many of these changes have resulted in a safer financial system for consumers, with greater consumer protection, as well as increased transparency of provider operations and financial information and more competitive fees.
Other changes - such as the impact of very low interest rates, changes in the eligibility criteria for products and services, changes to the age at which state pension is paid and changes to the benefits system - mean that individuals need to amend their financial plans to achieve sustainability in the longer term.
What is the state pension age for selected birth dates in the UK?
Born on 1 January Men Women
1950 65 60
1960 66 66
1970 67 67
1980 68 68
1990 68 68
2000 68 68
2010 68 68
Why have changes occurred due to access to computers and the internet?
Changes have also occurred because increased access to computers and the internet means that financial information and services are increasingly - and more easily - made available online or via mobile phones.
These changes include the development of smartphone apps, text services and software that help consumers to manage their money more effectively e.g. budget apps, websites offering free, unbiased and reliable financial advice.
Why have changes occurred due to new providers?
There are also new providers like Metro Bank and products like individual savings accounts or ISAs and basic bank accounts. There are new services like the current account switch service that consumers should now consider when planning, choosing and operating their financial products.
What is personal financial sustainability affected by?
Personal financial sustainability is affected by the sustainability of the economy in which an individual lives.
Before 1997, how were economic factors influenced?
What happened after 1997?
Before 1997, the government sought to influence economic factors by setting monetary policy that was implemented by the Bank of England.
In 1997, the Bank of England was made independent of the government and tasked with setting monetary policy to ensure monetary stability.
What Act gave the Bank of England responsibility for setting Bank rate?
This task (setting monetary policy to ensure monetary stability) was formalised when the Bank of England Act 1998 gave the Bank responsibility for setting Bank rate.
What is the intention of Bank rate?
The intention was that Bank rate would be a tool with which the economy could be manipulated to meet a Consumer Prices Index inflation target of 2 per cent. The goal is to deliver stable prices that will help to create stable, sustainable economy.
Describe the bank rate in the decades leading up to the change.
Bank rate had been high in the decades leading up to the change: in 1980, it stood at 17%; and in 1990, 14.875%.
In June 1998, Bank rate had been brought down to 7.5% - and by March 2009, in the aftermath of the global financial crisis, the Bank of England’s Monetary Policy Committee (MPC) had reduced the rate to an unprecedented 0.5% in an effort to stimulate the economy.
The 0.5 per cent rate was in force for a much longer continuous period than any previous rate. In August 2016, Bank rate was lowered even further to 0.25 per cent as a result of the Brexit referendum, before being raised slightly in 2017 and 2018. However, in March 2020 Bank rate was lowered to an historic 0.1% in response to the economic instability created by Covid-19, ie coronavirus.
What is the effect of a low bank rate?
The effect of this extremely low Bank rate is low returns on savings products and low charges on borrowing products. This means that savers wish to see Bank rate increase, while borrowers hope it will remain low.
What happens when Bank rate is uncertain?
It is always uncertain as to what it will be
Because it is difficult to predict when Bank rate will be increased, people are uncertain whether their current financial plans are sustainable in the long term. Their savings are likely to offer greater returns and their borrowings are likely to cost more at some point in the future – but it is not clear when.
What did Mark Carney say about Bank rate?
When will it be considered to increase?
In August 2013, Mark Carney, governor of the Bank of England, announced that an increase in Bank rate would be considered only if the UK unemployment rate were to fall to 7 per cent or below.
Towards the end of 2020 the unemployment rate was 4.9 per cent, which was more than 1 per cent higher than the previous year due to Covid-19
What is the boomerang generation?
Young adults that leave their parents’ home and then need to return because they cannot afford to rent or buy a home of their own.
In 2019 how many young adults lived with parents?
In 2019, around one in four young adults lived with their parent
What factors affect home affordability?
What is the trend and evidence of this factor?
Factor Trend
Private rental prices Moderate increase
- (evidence) By an average of 1.4% in the 12 months to November 2020
UK average earnings in real terms Slight increase
- For the 12 months to October 2020
Multiple of income that first-time buyers paid for a home Large increase
From an average of 2.7 times income in 1996 to an average of 4.5 times income in 2020.
Who does low interest rates and lack of home affordability affect?
Low interest rates and a lack of home affordability do not affect only young adults. Some older people who rely on their savings to supplement their employment income or pensions also find that they cannot sustain their personal finances.
As well as a sustainable economy, what else is needed for individuals to sustain their personal finances?
As well as a sustainable economy, a sustainable financial services industry is needed if individuals are to be able to sustain their personal finances in the long-term.
What is the purpose of the changes in the financial services industry?
The purpose of most of these changes, such as the new regulatory regime, is to make financial services safer for consumers, and to increase their choice of products, services and providers. All of these changes have a positive impact on the sustainability of individual finances and help to avoid market failure.
What were the changes within the financial services industry initiated by?
Many of the changes within the financial services industry have been initiated by the European Union, the financial services policy of which aims to deliver stable, secure and efficient financial markets.
How does the European Union achieve the aim of delivering a stable, secure and efficient financial market?
The Union achieves this aim by means of the European System of Financial Supervision (ESFS).
What does the European System of Financial Supervision include?
- the European Systemic Risk Board, which monitors the entire financial sector to identify potential problems that could lead to future crises and to take action to prevent them
- three independent regulatory bodies, all established on 1 January 2011:
−the European Banking Authority (EBA), which ‘works to ensure effective and consistent prudential regulation and supervision across the European banking sector’
−the European Securities and Markets Authority (ESMA), which ‘contributes to safeguarding the stability of the European Union’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets’
−the European Insurance and Occupational Pensions Authority (EIOPA), which aims to ‘support the stability of the financial system, transparency of markets and financial products as well as the protection of insurance policyholders, pension scheme members and beneficiaries’
What does the European Systemic Risk Board do?
It monitors the entire financial sector to identify potential problems that could lead to future crises and to take action to prevent them.
What does the European Banking Authority (EBA) do?
The EBA ‘works to ensure effective and consistent prudential regulation and supervision across the European banking sector’.
What does the European Securities and Markets Authority (ESMA) do?
It ‘contributes to safeguarding the stability of the European Union’s financial system by enhancing the protection of investors and promoting stable and orderly financial markets’.
What does the European Insurance and Occupational Pensions Authority (EIOPA) do?
It aims to ‘support the stability of the financial system, transparency of markets and financial products as well as the protection of insurance policyholders, pension scheme members and beneficiaries’.
What did Michel Barnier explain that the aim of the European regulatory framework is?
Michel Barnier, the EU Commissioner who was responsible for initiatives in the financial services industry, explained that the aim of the European regulatory framework is to co-ordinate between the national financial authorities of member states and to harmonise the technical rules that apply to the financial services sector.
Do member countries have to oblige to European Union changes?
Member countries are not obliged to implement the changes initiated by the European Union unless they are presented in the form of directives or regulations.
Explain the mandatory EU initiative (Directive 94/19/EC on Deposit Guarantee Schemes) that has been implemented by the UK.
The mandatory EU initiative that has been implemented by the UK is Directive 94/19/EC on Deposit Guarantee Schemes. The Directive required all EU member countries to offer a compensation scheme that would protect depositors should an authorised institution fail. The Directive set a minimum level of compensation of €20,000 per person, per institution. It was implemented in the UK by means of the Credit Institutions (Protection of Depositors) Regulations 1995, SI 1995/1442. These Regulations set the maximum amount of compensation at 100 per cent of deposits up to £2,000 and 90 per cent of deposits between £2,000 and £35,000.
The Financial Services Compensation Scheme (FSCS) was established to operate the guarantee scheme by the Financial Services and Markets Act 2000 and became operational on 1 December 2001. Then, in March 2009, the limit for compensation under the EU Deposit Guarantee Scheme Directive was raised: from €20,000 to be at least €50,000 euros by June 2010 – and to be €100,000 by the end of 2010. In the UK, the FSCS raised the compensation limit to £85,000 (the equivalent of €100,000).
Explain the EU regulation adopted by the UK, the EU gender directive.
Under Directive 2004/113/EC establishing the principle of equal treatment between men and women in the access to and supply of goods and services (known as the EU Gender Directive), a European court judgment determined that insurance companies should be prohibited from charging different insurance premiums for men and women. This led to an amendment to the UK’s Equality Act 2010. In practice, it means that young female car drivers are now paying more for their insurance premiums and that young male drivers are now paying less. In the past, young male drivers were charged more than their female counterparts because they are more likely to be involved in an accident. The Directive also requires that males and females should be offered the same annuity rates for their pensions. In the past, females were offered a reduced yearly income because they are likely to live longer.
Explain the EU regulation adopted by the UK, the transparency directive.
Directive 2004/109/EC (as amended), known as the Transparency Directive, was implemented in the UK in January 2007 by means of changes to the Financial Services and Markets Act 2000. The Directive applies to storing and providing regulated information, such as the financial reports of providers, annual and half-yearly accounts, and interim management statements, and the disclosure of major shareholder transactions. The requirement to publish this information makes it less likely that providers will be able to hide deficits in their balance sheets, which could lead to bank failure.
